How sustainable is Nigeria’s rising debt risk?

Following President Muhammadu Buhari’s request to the National Assembly to borrow a fresh N2.34 trillion approximately $6.183billion external loan, analysts and private sector leaders have said that the action will further plunge Nigeria into perpetual servitude.

Before the latest request, Nigeria’s total external debt stood at $33.348 billion, while total public debt stock as of December 30, 2021, which was released by the DMO in March 2021, stood at N32.915 trillion.

Buhari, in different letters to both chambers of the National Assembly urged the lawmakers to approve his request to borrow N2.3 trillion ($6.18billion) external loan to finance part of 2021 budget deficit of N5.6 trillion.

The president in another letter also canvassed a concurrent approval by the legislature for a total sum of $3,837,281,256, €910,000,000 and grant component of $10,000,000 for donor fund projects under the 2018-2020 federal government external borrowing rolling plan.

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The two request letters, dated May 6, 2021, came a month after the Senate and the House of Representatives approved $1.5 billion and €995 million external borrowings for the federal government to finance various priority projects and to support states facing fiscal challenges.

A former federal lawmaker, Godfrey Ali Gaiya condemned in its entirety, the N2.4 trillion ($6.18billion) loan which the Federal Government is seeking to finance the 2021 budget deficit.

According to the PDP chieftain, taking the loan when Nigeria is groping under economic pressure and difficulty is bad for the country.

Last year, the Federal government relied heavily on a slew of borrowings largely from multilateral organizations such as the IMF, World Bank and AfDB.

The huge reliance on the debt market was necessitated by shocks to revenue generation.

Similarly, the FG appears to be leaning heavily towards the external debt market in 2021, to spend its way out of the economic slowdown.

However, the concern remains Nigeria’s rising debt sustainability risk.

The government has historically justified its rising debt profile by the compliant debt-to-GDP ratio of less than 30.0percent.

However, the FG’s debt service cost as a percentage of revenue is a fairer reflection of the country’s debt sustainability position. This paints a grimmer picture.

This is because a huge proportion of nominal GDP does not contribute to the government’s ability to repay its obligations.

Recently, the pandemic driven revenue shock has exacerbated the already precarious debt service cost to revenue ratio (averaging 80% in 2020 vs. a historic average of 55%).

While deficit spending remains a critical fiscal policy tool to drive economic recovery, the Federal Government can no longer ignore the associated debt sustainability risk.